Opinion: Greenspan's comments buck historical trend

What he skirted around saying was the old expression that has cost so many investors and traders a lot of money in the past. The expression: “This time it’s different.”

Remember the “paradigm shift” of the tech bubble era? How many investors, and for that matter, analysts, said, “This time it’s different”? Old corporate America was to give way to the new technology era, so the old methods of valuing businesses, of selecting investments, were dead.

Whoops, that paradigm shift went into reverse. It’s just like when the “this time it’s different” crowd had their heads handed to them when biotech was all the rage or, if you want to really go back in history, the Tulipmania of 1636–1637.

Human nature is human nature. All too often we discard what we don’t want to hear and keep as truth that which supports our hopes. That’s frequently reflected in the losing stocks we continue to hold even when our few positive reasons are outweighed by realities that run counter to our wishes.

Ever say to yourself, “If this stock ever goes back to what I paid for it I am gonna sell it?” Chances are you had some vague reason that you used to justify holding it. How did you react when you came across news items or Wall Street research that disagreed with you? Let me guess: you ignored it or, even worse, stopped reading anything that you thought would further disagree with your decision.

Hey, don’t feel like you are the only one who has ever done that. It took me a long time early in my career to come to grips with the fact that I could actually be wrong and someone else could be right.

The question for Mr. Greenspan is why he thinks an inverted yield curve (short-term interest rates higher than long-term rates) that has historically foretold a slowing economy would not do so now? The last six recessions were preceded by an inverted yield curve.

Frankly, if the yield curve does invert, I will take the side of history rather than the obfuscating explanations of a Federal Reserve chairman who does not have the best record of managing rates.

If the yield curve inverts, our portfolios will be adjusted, with increased weighting in larger capitalization companies that have ample market liquidity, strong balance sheets and consistent sales and earnings.

We will also increase our clients’ cash reserves. (We have an advantage over most mutual funds and large pools of assets in that we are neither restricted as to the amount of cash we can hold in reserve for our clients nor are we required, or philosophically inclined, to be fully invested at all times. And we are small enough to raise cash without impacting prices.)

If the yield curve inverts and you have fixed-income issues in your portfolio and have employed the laddered maturity technique discussed in several previous columns, sit tight. You’re likely to do better regardless of the slope of the yield curve than those who try to move in and out of the bond markets every time Greenspan speaks or sneezes.

In the meantime, the summer doldrums I wrote about last month are continuing. Not bad for those who hold cash in anticipation of getting some bargains and who have diversified their investments geographically.

For the year to date, the S&P 500 Index is down 1.7 percent, a decline that for some was mitigated by holdings of non-domestic issues. That is especially true for those holding country- or region-specific assets.

For example, we frequently use Exchange Traded Funds, primarily Barclay’s iShares, for diversification outside the U.S. The iShares representing areas that have been among the best performers year-to-date include South Korea (+9.91 percent), Latin America (+8.65 percent), Brazil (+6.97 percent), and MSCI Emerging Markets (+2.65 percent).

We urge investors to not overlook investing outside the United States. The best asset-allocation approach is not fully diversified if only domestic issues are held.

For more information on using Exchange Traded Funds to complete your portfolio, click on ETFs on Yahoo! or Google iShares.

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

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